Coca-Cola (KO) has been mostly dead money for investors during the past year. No doubt, this has been in stark contrast to the previous four years, in which the compound annual return was nearly 15%.
The past year’s gains (or lackthereof) would be disappointing in any environment. But they’re even worse considering that Pepsico (PEP) has been getting an edge on Coca-Cola stock.
In the past year, PEP has outperformed KO by about nine percentage points, raising the question: What the heck is going on with Coca-Cola stock?
Is there any foreseeable end to Coca-Cola’s weakness? Or are investors better off leaving KO stock alone for now? Here’s a look at the pros and cons for Coca-Cola stock.
Coca-Cola Stock Pros
Coca-Cola is a global powerhouse.
KO sells more than 3,500 products across more than 200 countries. In fact, there are 20 brands that generate sales of at least $1 billion per year, including Sprite, Minute Maid, Dasani and Powerade.
Coca-Cola is one of the most admired brands in the world, allowing for premium pricing. Yet the company has not rested on its laurels as it continues to invest heavily in marketing, especially cutting-edge categories like social media and mobile.
It is also comforting that the largest shareholder in KO stock — Berkshire Hathaway’s (BRK.A, BRK.B) Warren Buffett — remains bullish on the company’s prospects. According to Buffett: “If you’re looking for a wonderful business, it’s hard to beat Coca-Cola, so that’s why I am here. We’ve got the product, that’s been proven since 1886.”
Restructuring efforts are on track.
In October 2014, Coca-Cola CEO Muhtar Kent announced a wide-ranging transformation of the company. Some of the key initiatives included: more disciplined growth strategies, streamlined and simplified operations, improved cohesiveness with R&D programs and more focus on productivity.
A major part of the program is cost reduction. To help with this, KO has adopted zero-based budgeting as well as the unloading of its distribution operations
And so far, Kent believes that things are on track, with more than $500 million in forecast savings for the current year — and $3 billion by 2019.
Financials are rock-solid.
During the last quarter, free cash flow came to a robust $1.1 billion.
In other words, KO has the resources to continue with its dividend payments and share buybacks. For example, in 2015 the company increased its payout by 8% to $1.32 per share. Coca-Cola stock has increased its dividend for every year for more than half a century!
Coca-Cola Stock Cons
Macro factors aren’t helping.
The key driver of demand for Coca-Cola products is disposable income. Unfortunately, the global economy has been fairly sluggish lately, pulled down by countries like Russia, Brazil and China. And with two-thirds of profits coming from outside the U.S., the surge in the dollar has put additional pressure on the top line.
Perhaps the biggest threat is China. Despite three cuts in interest rates during the past six months, the economy continues to cool down. Then again, the country may have reached the limits of its massive expansion in construction and infrastructure building. If anything, this has resulted in large amounts of debt and speculation, which could ultimately lead to a recession.
Coca-Cola is losing its mojo.
The company is doing well when it can grow sales volumes at 3% to 4%. But over the past couple years, it has been about 1%. And it looks like this will be the case for 2015.
One reason is the changing tastes of consumers, who seem to increasingly prefer healthier beverages. After all, Whole Foods Market (WFM) won’t even carry Coca-Cola.
Unfortunately, these don’t appear to be temporary trends. In fact, soda demand has decreased for 10 straight years in the U.S.
Coca-Cola throwing more money into investments.
The competitive environment is fierce for KO. Its biggest rivals include major players like Pepsi, Red Bull and and Dr Pepper Snapple Group (DPS).
In order to stave off that competition, KO has been getting more aggressive with investments. Two of the more notable moves were large positions in Monster Beverage (MNST) and Keurig Green Mountain (GMCR).
But the results have been mixed so far. For example, MNST has been slowing and GMCR recently had a lackluster product launch.
Bottom Line for Coca-Cola Stock
It looks like KO is taking the right steps — the cost cutting in particular should help boost margins. But given how many challenges the company faces, these moves may not be enough for Wall Street to start loving Coca-Cola stock again.
The global economy is still sluggish and there are few signs of a rebound. And the the soda industry continues to undergo major changes with consumer perception. For the most part, the KO brand is associated with sugary drinks, which are losing their appeal.
In other words, it could be tough for the company to reinvigorate growth. After all, about 70% of revenues come from the soda business.
So, should you buy Coca-Cola stock? Not now — the company has yet to put together a convincing plan to get things back on track.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
